Headed by Reserve Bank Governor Shaktikanta Das, the six-member Monetary Policy Committee (MPC) will begin its three-day meeting today and the decision would be announced on August 10. The Reserve Bank of India (RBI) is widely expected to maintain a hawkish stance in its upcoming monetary policy meeting and keep the policy repo rate unchanged for the third straight time at 6.5%. The central bank is seen continuing with its policy stance of ‘withdrawal of accommodation’ to ensure that inflation progressively aligns towards 4% target by 2024.

In the last two policy meetings in April and June, the MPC decided to maintain status quo on the key repo rate — the rate at which RBI lends money to commercial banks to meet their short-term funding needs. The repo rates are already up 250 basis points (bps) from the lows of May 2022 and a full 135 bps higher than the pre-pandemic repo rate of 5.15%.

Analyst expectations from RBI

Analysts are of the view that the MPC will keep the benchmark interest rates unchanged with hawkish guidance, given the recent uptick in consumer price index (CPI) inflation due to spike in prices of vegetables across India, with the retail price of tomatoes touching ₹200 per kilogram in some states. The CPI inflation rose to 4.81% in July 2023, but it remained below the RBI's upper tolerance limit of 6%. 

On the global front, the US Federal Reserve and the European Central Bank (ECB) announced another quarter-point hike in their respective policy meetings in June to tame inflation.

In the last policy meeting on July 26, 2023, the Federal Reserve, the central bank of the United States, hiked the key interest rate by 0.25% to 5.5%, the highest level in 22 years, in a bid to combat inflation in the world’s largest economy. In a similar trend, the ECB raised interest rates by 25 bps to 3.75%, its highest level since 2001.

However, analysts believe the RBI is unlikely to follow suit and maintain ‘wait and watch’ approach on both interest rates and policy stance. The central bank is likely to play it safe by retaining the current policy rate and the stance of ‘withdrawal of accommodation'.

Apurva Sheth, Head of Market Perspectives & Research, SAMCO Securities says that it will be too soon for RBI to make any changes.

“RBI is likely to keep the benchmark repo rates unchanged yet again in the upcoming monetary policy meet scheduled on 10 August. Inflation has witnessed an uptick from 4.31% to 4.81%. Monsoons have also led to a jump in food prices. Apart from this, the US Fed has also increased their interest rates to a 22 year high of 5.5%. India 10 Year bond yields have jumped close to the key resistance of 7.2%. This indicates that the probability of RBI hiking rates has gone up. However, we believe that it’s too soon for RBI to make any changes. We believe that for the time being RBI would apply a ‘wait and watch’ approach on both interest rates and stance,” says Sheth.

V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, says the MPC is unlikely to do anything that upsets the growth apple cart. “The MPC will be concerned about the high vegetable inflation prevailing now. But since this is due to seasonal factors monetary policy cannot do anything about it. More importantly, there is strong growth momentum in the economy now and the MPC is unlikely to do anything that upsets the growth apple cart. So, the rates and stance are likely to remain unchanged.”

“Investors should be focussed on the growth and earnings prospects of different sectors and companies within sectors. Banking, capital goods and autos are on strong wicket, he added.

Sampath Reddy, Chief Investment Officer, Bajaj Allianz Life Insurance says the RBI may consider increasing rates during the current rate hike cycle if there is a resurgence in inflation. “In the last policy meeting, the RBI maintained that next policy action would depend on the evolving growth and inflation dynamics in India. We believe that we are close to the end of the rate hike cycle in India,” he says.

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